Preparing for the Rainy Day Russia's years of "de-dollarization" efforts have finally borne fruit

Financial Associated Press (Shanghai, editor Xiaoxiang) - Although it has not been possible to predict when the final stick will fall, since the Crimean crisis, Russia has clearly been preparing for the sanctions imposed by the West today for many years.

Over the past few years, Russia has struggled to eliminate the dollar's "invisible" control over its economic operations and financial markets. So far, the effort has paid off – it has helped Russia greatly mitigate the negative impact of the sanctions imposed on it by the United States and its allies, even as they have just introduced so-called harsh measures that could test the extent to which Russia is truly decoupled from the dollar.

According to the Central Bank of Russia, the country cut its dollar reserves to just 16 percent of the central bank's total reserves in 2021, down from more than 40 percent four years ago.

This means that Russia is aggressively reducing its holdings of U.S. Treasuries and removing dollar assets from its sovereign wealth fund. Data at the end of last year showed that Russia currently holds only $3.9 billion in U.S. government bonds, down from $176 billion in 2010, which is now equivalent to just 2.2 percent of the time.

After the full-scale outbreak of war between Russia and Ukraine on Thursday, the United States and Europe announced further sanctions against Russia. But Russia's preparations in previous years will undoubtedly help to insulate Russia from or mitigate the negative effects of escalating sanctions.

While a series of sanctions so far in Europe and the United States will prevent Russia from reaching international investors — the United States will ban trading in some of Russia's sovereign bonds in the secondary market from March — russia's efforts to reduce its dependence on the dollar over the years could weaken the impact of the sanctions and could buy Mr. Putin time to fend off, at least for a while, these tougher sanctions.

Further punitive measures , such as restricting Russia's use of SWIFT , could cost Russia more and provoke a more serious response in global markets — but the option itself is divided within the NATO camp: British Prime Minister Boris Johnson is pushing to remove Russia from SWIFT, but both U.S. President Joe Biden and the European Union sides on Thursday.

Ehsan Khoman, head of emerging market research for Europe, the Middle East and Africa at Mitsubishi-Tokyo-Fedian Bank (MUFG) in Dubai, said: "Russia has taken quite a few steps to diversify beyond the dollar, which has helped it increase its resilience to sanctions, and although comprehensive economic sanctions are triggering serious market volatility, the risk of Russia falling into a recession cannot be ignored." ”

Out of the "clutches" of the dollar

Of course, it is almost impossible for Russia to completely separate from the dollar at present. Russia's main export commodities are oil, petroleum products and natural gas, which are usually traded in dollars on the global market.

However, some of Russia's oil export contracts have now begun to switch to trading in euros. Paresh Upadhyaya, head of foreign exchange strategy at Amundi Asset Management, said Russia may no longer need access to foreign financial markets to raise financing as the Ukraine crisis pushed already soaring crude prices to more than $100 a barrel.

"The Russians don't really need to issue bonds overseas anymore," he said. "When you combine their foreign exchange reserves with the State Welfare Fund, the likelihood of a balance-of-payments crisis is almost zero."

Russia's central bank estimates that the country's current account surplus reached a record $19 billion in January, more than double the same period in 2021. Russia's sovereign wealth fund, the State Welfare Fund, has more than $170 billion under management. The sovereign fund has not held U.S. dollars since June 2021.

In fact, since the outbreak of the Crimean conflict in 2014, Western countries have imposed long-term multi-faceted economic sanctions on Russia, including visa bans, asset freezes, trade disruptions, financing cuts and so on. In the face of uninterrupted Sanctions from the West, Russia is gradually trying to strengthen its own resistance.

Over the past few years, Russian policymakers have taken a multi-pronged approach to changing the economy's dependence on the dollar, including taking steps to settle more international trade in other currencies. In 2020, the euro replaced the US dollar as the main currency for the settlement of Russia's exports to China, and China is Russia's main trading partner. Just this month, Gazprom said it had switched to renminbi settlements to address the refueling of Aeroflot flights in China.

According to a study by Anna Zadornova, an economist at UBS Group AG, the dollar's share of Russia's export earnings has fallen from 69 percent in 2016 to 56 percent in the first half of 2021, while the euro has doubled to 28 percent.

Of course, although the Russian economy has tried to de-dollarize, if Europe and the United States finally sacrifice SWIFT as a big killer, it may still make the Russian financial system difficult to easily resist.

Thousands of banks around the world, including nearly 300 Russian banks, will now use SWIFT's secure communication system in their transactions to make simple transfers and settle their customers' transactions or securities, stocks or bonds.

Although the Russian central bank has a financial information system that can replace SWIFT, it is currently in limited use – only about 400 users. In 2014, when Russia's use of SWIFT was threatened, Alexei Kudrin, a former Russian finance minister close to Putin, had estimated that SWIFT could reduce Russia's gross domestic product by 5 percent in a year.

But Europe and the United States themselves have their own concerns about using the killer, with Western officials fearing that an easy ban on the use of SWIFT by other countries, especially major powers such as Russia, which are important players in international commodity trade, would encourage them to look for alternatives. Prior to this, Iran was the only country that had been cut off from SWIFT by Europe and the United States.

At the same time, without harsher measures, Russia does have the ability to hold back on sanctions for the time being, despite the possibility of facing some short-term economic pain. "Russia has isolated itself from the global market," said Simon Harvey, head of foreign exchange analysis at Monex Europe Ltd., "the country has learned the lessons of the past 10 years and is well prepared for this possibility." ”